What's making writers and studios so nervous

The union says it won't be shortchanged on new media as it was with DVDs. But no one's sure of future dollars.

Damon Lindelof got a sobering glimpse of his future as a television writer two years ago as he strolled through the Grove shopping plaza in Los Angeles.

Hanging in the window of the Apple store was a gigantic poster for "Lost," the hit ABC show on which he serves as executive producer. Just days before, ABC's owner, Walt Disney Co., had announced that "Lost" and other TV programs would be sold through Apple's iTunes store.

Though Lindelof was thrilled that his show was at technology's vanguard, he was dismayed that Disney had not consulted him about either the program's digital debut or the pay he and his fellow writers would receive.

"I felt like somebody was trying to pull the wool over my eyes," Lindelof said Friday, as he picketed outside Disney's gates.

Such suspicions are widely shared by many of the 10,500 members of the Writers Guild of America, who have been on strike for two weeks. Talks between the writers and the major Hollywood studios about a new contract are scheduled to resume Nov. 26, but the walkout will continue until a pact is finalized. The parties remain far apart -- particularly about compensation for new media.

Writers fear they are being shortchanged as the studios rush to distribute their TV shows and movies on the Web, cellphones, video iPods and other devices. The payments they receive when their material is reused, known as residuals, help writers weather the feast-and-famine cycles of Hollywood. As a result, they view this is as a seminal moment to claim their fair share of new-media revenues, not just for themselves but for future generations of writers.

The studios, however, are worried about committing to the guild's new-media pay demands when the economics of the Internet and other digital technologies are uncertain. Sales at the moment are minuscule, amounting to millions, not billions, of dollars. Internet video advertising is also in its infancy, and no one knows just which format will click with consumers. Will they pay to download movies or insist on watching them free?

Still, entertainment industry executives have touted digital media as a key driver of future growth. "Even the most ardent DVD supporter at a studio would have to admit that a good proportion of the content is going to be delivered electronically," said Kurt Scherf of Dallas-based Parks Associates.

In fact, the current stalemate between writers and studios is based in part on their shared nervousness about the toll new media is taking on their traditional sources of income. The Internet has lured away younger viewers and advertisers from television while threatening to make movie studios more vulnerable to piracy and to gut their lucrative DVD business, which has recently peaked.

"The writers and the producers are in the same boat," said David W. Rips, director of Deloitte & Touche's media and entertainment practice. "Writers want to know what their percentage of residuals should be, but they don't know what the total market size is or the profitability of that market. And the producers are in the exact same position."

Writers have seen the sea change coming as the consolidation of media companies left fewer content buyers. The $2-billion-a-year syndication market, in which TV studios sell reruns of their prime-time hits to TV stations and cable channels, has been in decline. The most popular shows no longer fetch the premiums paid a decade ago.

Some of TV's biggest hits, serialized dramas such as "Lost," don't repeat well -- further reducing their value in syndication. "All of the supplemental viewing of 'Lost' has gone from traditional media platforms to new-media platforms -- DVDs, digital video recorders, downloads of the show and online streaming," said Carlton Cuse, an executive producer and a member of the WGA's negotiating committee.

Though the dispute between writers and studios centers on future revenues, the roots of the conflict date to 1985 and a much-maligned pay formula for home-video residuals. Under the arrangement, 80% of the wholesale revenues were taken off the table to cover manufacturing and other costs tied to the fledging home-video market. Writers and other talent unions receive residuals based on tiny fractions of the remaining 20%. For the writers, that amounts to 0.36% of wholesale revenues, or about 4 to 6 cents for every DVD sold.

At the time, guild officials say, studios contended that the royalty was crucial to getting the fledgling videocassette business off the ground. The guild was embittered when VHS tapes, and later DVDs, became a multibillion-dollar business.

But studio executives say the royalty was market-based and no one anticipated the home-video boom.

Guild leaders have tried repeatedly to increase the DVD rate, but studios stood firm, pointing to the rising production and marketing costs of TV shows and movies, including the salaries of stars like Johnny Depp, marquee directors such as Steven Spielberg and top writers like J.J. Abrams ("Lost," "Alias").